Innovation in the UK Retail Sector - Nesta

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Innovation in the UK Retail Sector “We have completely different criteria for new products, yes, completely different criteria because it depends on the stage the project or the range or the brand [has reached]. … we do have completely different criteria for the mature brands” (Business Development Director). 7.4 Therefore measuring innovation in retailing often boils down to measuring business organisational and operational performance with more traditional although organisationally adapted measures of performance. Practitioners appear not to be short of such measures: “We are very measurement-driven, so on the non-food side we’ll know performance by category, by product, evolution by product, percentage, innovation, all of those things we have” (CEO). 7.5 But retail practitioners also realise that the soft benefits of innovation - in terms of brand value, or total impact on the business - are less well measured, due to limitations in the management accounting systems, and the lack of integration between pre-existing budgeting silos. As a result, they are not sufficiently understood. Further, most retail measures tracking innovation are designed for products, and are fewer available to measure process innovation – and precious little focus on organisational innovations or longer term drivers of growth. “I think that the difficulty comes more when you try and set strategic targets for innovation where a measure like, say; in five years time X percent of our sales will come from new products” (Senior Manager, Strategy Department). “I don’t think retailers are very good at assessing the soft benefits of innovation. The language that talks to them best is money, bottom line, and how much extra is in the till, that's how they tend to think of it” (Retail Consultant). Figure 7.1. Usage of financial and non-financial measures of innovation 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 84% Source: Hristov, 2007 65% Overal financial measures Overall non-financial Financial and non-financial measures 59% Page 48
. Types of Measures Innovation in the UK Retail Sector 7.6 Although the precise nature of the retail measures of innovation varies among companies, depending on sub-sector or upon managerial choices, there are broadly two main types: (1) financial and (2) non-financial measures (Figure 7.1). i. Financial measures 7.7 Financial measures provide visibility about the concrete contribution of innovation to the top and bottom lines of the business. The role of these measures is to ensure continuous performance improvement based on the evaluation of the data about rates of return, profit margins, costs-benefit ratios etc. They are seen as essential for delivering the necessary data for setting the strategic objectives (where do we want to go?), for deciding upon resource allocation (how might we get there?) and for continuous tracking, review and corrective actions along the way (how do we check progress?). 7.8 84% of our respondents essentially use at least one or more financial measures, the top 3 measures being sales and market share measures, rate of return measures and measures of profitability: “I look at all the things that are going to affect change, ninety-nine of them are financial-related- they have a financial benefit. There are some that have a financial cost, [such as] ‘we were innovative in the way that we pay our store managers’, that’s going to increase our costs - but we think long-term it will reduce training, so it’s an economic deal” (CEO). “Well fundamentally we measure sales, margin, and return on invested capital” (Marketing Director). • Sales and market share measures have a 78% share of responses. These include measures of sales in volume and value, incremental sales from new products and services, like-for-like sales since launch, sales densities (per sq ft/sq m) of new products, categories, or retail formats. Some retailers have sales targets for new products or share of new products in the range, whilst others use broader measures such as overall share of market, share of customers or share of wallet. “For a first year we actually set a target for a number of fresh products. That will be one of the KPIs, where historically it has not been a KPI” (Marketing Director). “Like for like sales volumes, and sales per sq ft of the different brands and how they compare with the overall performance of the chain as well two-year payback for new initiatives. Very, very simple, it’s part of the mechanics of the business” (CEO). • Rate of return measures i.e., ROI, ROIC, ROS 13 . (64%). The sector uses rates of return of new products, services or other innovation initiatives as financial measures of innovation. These include ROI from 6 to 12 months for new products (depending 13 ROI – return on investment, ROIC – return on investment capital, ROS – return on sales Page 49
Page 1 and 2: Report for NESTA December 2007 Inno
Page 3 and 4: Contents Innovation in the UK Retai
Page 5 and 6: Innovation in the UK Retail Sector
Page 9 and 10: 2. The nature and contribution of r
Page 23 and 24: v. Retailers’ reverse innovation
Page 41 and 42: Vignette 5.3: Currys customer recyc
Page 43 and 44: 6. What are the barriers to retail
Page 47: 7. What are the measures of retail
Page 65 and 66: . Promoting innovation in sustainab
Page 69 and 70: Conclusion/Next Steps: Innovation i
Page 73 and 74: Recommendation 4: Innovation in the
Page 77 and 78: Appendix 1 Research Methodology 350

Innovation in the UK Retail Sector - Nesta

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